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Can Poor Countries Afford to Eliminate Extreme Poverty on their own?

Most poor countries do not have enough money in their economies to bring everyone out of extreme poverty through redistributing taxes alone.

Only once countries tend to have reached upper middle-income country status does it become theoretically feasible for them to be able to eliminate extreme poverty on their own.

Background

Most low and lower middle-income countries can’t afford to eliminate extreme poverty by redistributing taxes on their non-poor population to those in extreme poverty. Former World Bank economist, Martin Ravallion, illustrates this. He defines being non-poor by a developed country standard, living above the US poverty line of $13 a day (or an annual income of around US$5,000). Ravallion calculates what the additional (marginal) tax rate would need to be in a developing country on the non-poor population to be able to raise enough tax revenue to be able to theoretically bring everyone out of extreme poverty (see chart below). For example a country with an average income of around US$1000 a year would need to raise the tax rate on their non-poor (or ‘rich’) population by 60 percentage points to generate enough tax revenue to give to the poor to lift them out of extreme poverty. This is quite unrealistic politically.

As incomes in poor countries rise, through economic growth and other measures, the additional tax rate required to raise enough revenue to eliminate extreme poverty becomes more politically feasible. However in the meantime, external funding sources such as aid, are needed in most low and lower middle-income countries to be able to eliminate extreme poverty. Relying on redistributing taxes alone would push the non-poor back into poverty (by developed country standards). This seems to suggest that the rush by some aid donors to abandon providing aid to some middle-income countries is premature. Assistance is still needed to end extreme poverty in many of these countries.